Macroeconomics in the U.S.: Fundamentals and implications for radiologists in 2012

By Frank J. Lexa, MD, MBA, Drexel University College of Medicine and The Wharton School, University of Pennsylvania, Philadelphia, PA, and Instituto de Empresa, Madrid, Spain

Dr. Lexa is the Vice Chairman and Professor of Radiology,
Drexel University College of Medicine Project Faculty, Spain, United
Arab Emirates and East Asia Regional Manager, the Global Consulting
Practicum & Adjunct Professor of Marketing, The Wharton School,
Professor of Business Development in the Life Sciences, Instituto de
Empresa, Madrid, Spain.

We can evade reality, but we cannot evade the consequences of evading reality. —Ayn Rand1

Well intentioned stupidity is still stupidity. —F. J. Lexa

For
many radiologists, macroeconomics is something that is both
misunderstood and underappreciated. For radiologists in my generation,
it is fairly safe to say that only a minority of my peers had even taken
a course in economics during college, let alone developed a reasonable
command of the subject. In my university, most of us who were pre-med,
majoring in biology and the other sciences, had neither the time nor the
inclination for the material. Compared to chemistry, biology, and
physics, the science seemed soft and the assumptions didn’t seem to
correlate with, well, the real world—the 1970s witnessed terrible
economic times coupled with poor fiscal and monetary choices. Economics
at that time appeared highly politicized into left and right camps, an
unfortunate circumstance that degraded credibility. Moreover, the
coursework seemed to diverge into 2 completely different directions—one
towards rather challenging forms of applied math for those going to Wall
Street, and another toward a rather easy path for those hoping to get
professional sports contracts.

As this article goes to print in
2012, it is fair to say that macroeconomics has more than proven its
relevance in the past 3 years. In recent years, economic travails have
brought down governments in the West. Over 10 trillion dollars (U.S.) of
value was destroyed worldwide and, as this article goes to print, the
recovery is incomplete with threats of a relapse into a double-dip
recession still on the horizon. The political factions within the field
are again evident with public arguments in newspaper columns and the
electronic media, as policies are debated around Keynesian interventions
versus market forces raging onward. In the political spectrum of the
United States of America (U.S.), groups from both the right, the Tea
Party, and the left, in the Occupy Wall Street movement, demonstrate
anger and impatience with the government’s handling of macroeconomic
issues.

In the wake of the crash of global financial markets, we
are also seeing more clearly how societal choices lead to poor economic
decisions and their ramifications. At the time of writing this article,
several major European countries are facing very difficult bailouts with
more likely to follow. The U.S. is not far behind with its own heavy
deficit spending and a record amount of debt that is forcing a political
crisis. The longer-term implications of societal spending and
entitlements are not being addressed adequately and will come to the
fore in just a few years. This article will provide a short primer on
what is important in macroeconomics, particularly as it impacts upon
those of us in medical practice now and in the future. The core
principles will be covered and I will direct you to resources that I
hope will help in understanding this topic and prepare you for the
turbulent times that are coming.

GDP: What it is, why it matters

Gross
domestic product (GDP) is the sum total of the final value of goods and
services produced by a nation. It is denominated on a per annum basis
and is probably the single most important factor in analyzing the
economic status of a nation, the trends in improvement (or worsening) of
a nation’s economy, and the implications of policy decisions. Growth in
GDP is good, especially when you factor in the population changes and
the GDP per person is increasing. To a first approximation, this
correlates with greater new wealth per person and greater availability
of resources. The standard calculation for GDP includes both the public
and private sector with the following formula:

Y = C + I + G +
(X-M), where: Y is GDP, C is consumption, I is income, G is government
spending, X is exports, and M is total imports.2

A
rising GDP per person means that there are more public and/or private
resources available within society. Whether you are a leftist, a
rightist, or centrist, this is a good thing. This increase in
productivity should be welcomed regardless of whether your personal
preferences lead you to believe that this surplus should go back to
workers through lower taxation or to be kept and spent by the government
on anything from better schools, to hospitals, high-speed rail lines,
Mars colonization, or aircraft carriers.

In the other direction, a
decline in GDP per capita results in lowering of living standards and
difficulty in maintaining current programs. In fact, a “rule of thumb”
for the definition of a recession proposed in the 1970s, and then
repeated in many text books, was 2 consecutive quarters of decline in
GDP.3 In the U.S., the arbiter of deciding when a recession
has officially started and stopped is the National Bureau of Economic
Research or NBER. While they consider a variety of more detailed factors
in making their decision to declare that a recession has started, poor
GDP performance is both a key factor as well as strong correlate with
most of the other elements that they have to consider. Whenever you
listen to an economic or policy debate, always consider what the effect
would be on GDP, particularly the long-term effect. If healthcare is
being blamed for being a drag on the future GDP of the republic, you can
bet that “reforms” will be coming.

Real economic growth

Given
the centrality of GDP in evaluating the economic state of a nation, the
next obvious question is: What can we as a society do to promote GDP
growth? How can we become more productive? There are many answers to
these questions, but none of them are as simple or easy as you might
surmise from the discourse on cable news channels. First and foremost,
look for ways to improve productivity in a society. Making more with
less is a form of “free” growth. Consider the example of agriculture in
the U.S. Just over 100 years ago; the majority of the U.S. workforce was
employed in producing food to feed the nation. Now, only a tiny
fraction of U.S. citizens work on farms, and we produce enough food not
only to keep the nation fed (or, unfortunately, in many cases overfed)
but also to serve as an important source of exports for the U.S.
economy.

Similarly, the revolution in information technology has
made computing power exponentially cheaper during the lifetime of the
readers of this article. A now famous observation by Moore, that
computing power doubles roughly every 1.5 to 2 years, explains why most
of us have much more processing capability in our homes (and many of us
on our persons) than went to the Moon with the Apollo astronauts.4

While
the above factors are impressive, they involve forms of innovation that
led to more of everything and more for less. Unfortunately, much of the
public debate revolves around tradeoffs in policy choices that affect
GDP in more of a win/lose or close-to-zero-sum fashion. These include:
taxation, government spending, trade policy, and other choices that a
society makes. While current controversies rage over short-term stimulus
programs and poor investments by the government in solar power
companies, to be fair it should be noted that there are examples of
government programs that have had positive effects on the GDP. These
include examples such as the Federal Highway system, early research that
led to the internet, the GI bill, and others. Supporters of further
government intervention and spending in sectors as diverse as space
exploring and clean energy like to cite the successes above.

The
recent bankruptcies of some of the government-backed clean energy
efforts should give you pause in assuming that this is the best use of
public funds. Then there are examples of over-hyped or downright dubious
ideas, such as corn-based ethanol that have not (and may never) grow
into productive sectors that can stand on their own. You, as a
healthcare provider and taxpayer, should always consider both sides of
the coin (pun intended) when you examine a controversial issue about
government spending.

Short-term interventions and outcomes

The
effects of government intervention become much more suspect when
evaluated closely, particularly when the longer-term impacts are
included. There is a myth that the government can “improve” the economy
by merely flipping a switch in Washington. Those levers include spending
programs, loosening monetary policy, etc. Much of this, though, merely
causes a short blip in economic activity with a substantial cost to pay
back down the road. I sometimes use the analogy of my son opening the
refrigerator door to cool the kitchen down. If you stand next to the
open door, this does work for a short distance and short amount of time,
so it makes sense to him and to other 5-year-olds, but obviously it
isn’t the right way to get the job done.

Economists on the right
like to point out the illusions of job creation. In most cases, the
government can’t really create a net increase in jobs in the longer
term. Every salary the government pays out uses dollars that were taken
from somewhere else — from someone else’s taxes. This has been a
criticism of the current administration’s stimulus package, as well as
of President Roosevelt’s interventions during the Great Depression over a
half-century ago. In the former case, the cost per job created has been
cited as being as high as $278,000 USD or, to use another metric, it
takes several taxpayer jobs to pay for one government-created job.5

In
the case of the latter, which has been more thoroughly studied given
the benefit of the intervening decades, a clearer picture emerges. While
the Keynesian interventions early on were effective at creating some
jobs programs and building a safety net, they did not reduce
unemployment to pre-depression levels even after the economy recovered.
Unemployment remained stubbornly high until the U.S. entered into World
War II and the concomitant need for wartime materiel production boosted
the employed workforce.

Compounded growth: Why it is unsustainable for anything to grow faster than GDP forever

Healthcare
has become one of the central economic issues in the U.S. Whether your
view is short term or long term, and whether you are focusing on the
public or private sectors, healthcare dominates any discussion of
government and private sector expenditures for several key reasons.
First is that healthcare spending in recent years has generally
increased faster than both inflation and growth in GDP. At first glance
that would seem like a good thing. Successful companies grow faster than
GDP. Fast growth is a source of real increase in wealth and if you are a
young physician it would seem to imply job security. The problem with
anything that chronically grows faster than GDP is that it eventually
becomes the economy of the country.

In the natural history of a
start-up company, growth eventually slows as the company successfully
dominates its market. In the early years of Microsoft, growth was so
robust that there were stories of engineers bragging that someday the
company would rival the size of the largest economies in the world.
While the company did enjoy phenomenal growth, that did not happen, and
the company eventually entered a growth phase more in line with a large,
mature entity.

In the case of healthcare in the U.S., this is
not an exaggeration. If current growth rates were to continue unabated,
then by the second half of the 21st century pretty much all
of the government spending in the U.S. would be going to pay for
healthcare. If nothing were to change by that point, then consumption of
the entire economy will follow. That is an example of the promise and
peril of compounded growth, but in the real world that will not happen.
As a famous economist once said: “If something cannot go on forever, it
will stop.”6 In the case of the U.S. healthcare industry,
the stopping point appears near. The passage of the Patient Protection
and Affordable Care Act (PPACA) in March of 2010 sent a strong signal
that the government was serious about trying to control not only growth
in costs but also many other aspects of how healthcare is delivered in
the U.S.

In an earlier generation, the alarms in the press over
unfunded entitlements tended to focus on the Social Security
Administration. Workers were concerned (correctly) that unless
adjustments were made, they would never collect on the payments that
they were making for their shares in the system. Over the life of the
program, a combination of increased longevity and decreased birth rate
has substantially changed the ratio of active workers to living
recipients and without adjustments in taxes, retirement age, or use of
other levers, the young workers’ worst fears may come true.

However,
if you want to be concerned about something more important, you need to
understand that spending by CMS on Medicare and Medicaid in this
century is projected to dwarf that of social security several times
over. To put this into perspective, let us consider 3 numbers.
Regardless of your politics or preferences, there are 3 key numbers that
you need to both understand and pay attention to if you are going to
honestly analyze the future of healthcare in the U.S.

U.S. federal deficit, the debt, and unfunded obligations

The
first is the deficit. This is the shortfall in the government’s
receipts and spending in a fiscal year and is analogous to a business
income statement. In general, surpluses have been rare in recent
decades, but the current year is projected to be approximately $1.6
trillion in the red. This is a record by itself, but if you analyze it
as a fraction of the GDP, in the last century it has only been higher
during the periods of the 2 world wars. The next number is the debt of
the U.S. federal government. As this article is being prepared, this has
been in the press because of political battles in Washington, and is
now over $14 trillion. This is also a large number and is closing in on
the GDP of the country. That is a disturbing level given that economists
have observed that once a nation borrows to the level of 90% of GDP, it
reaches a tipping point leading to poor economic outcomes including a
loss of GDP growth.7

However, the third number, the
unfunded obligations of the U.S. government-dwarfs even the debt and is
the real issue. These are the promises to provide social security,
Medicare, etc., to future generations. These are obligations for which
there are no current assets set aside and which will therefore require
future tax or other revenue streams. Estimates of that number range from
a low of just over $60 trillion to over $100 trillion with the majority
of it again in the category of CMS.8, 9

Inflation, monetary policy, and other issues that you should know about

Early
on we focused on real increases in the magnitude of an economy.
However, there are also false increases. Inflation is a term for
increasing prices for goods. A definition of inflation is: “a
persistent, substantial rise in the general level of prices related to
an increase in the volume of money and resulting in the loss of value of
currency.”10 Inflation can erode the value of savings and
fixed benefits so it has substantial impacts on many sectors of society.
The federal government has some controls over inflation. These include
reductions in federal spending and borrowing which generally will reduce
inflationary tendencies in the economy. To make the point clear about
real and imaginary increases, consider getting a raise of 2% in 2011.
The domestic inflation rate for 2011 looks like it will finish the
calendar year at just under 4%. You lost money even with your raise. You
may laugh at the obviousness of this, but it isn’t funny when this
happens year after year.

Interest rates, a related but separate
topic, are also affected by policies of the Federal Reserve. The Federal
Reserve acts as a central bank for the U.S. and can affect inflation
and interest rates through several mechanisms: 1) setting bank reserve
requirements; 2) open market operations such as buying and selling
securities; ie, the government sells bonds receiving cash from banks and
reducing the money supply; and 3) setting the discount rate that banks
can use to borrow from a Reserve bank. Generally the Federal Reserve
tries to walk a tightrope between stimulating a sluggish economy and
preventing inflation from an overheated one. Increasing the money
supply through easy credit can help energize an economy, but also
carries the risk of increased inflation. Conversely, aggressive attempts
to control inflation can dry up credit and take the winds out of the
economy leading to unemployment.

Applied macroeconomics and the future of radiology in the U.S.

In
the first section of this article, we focused on the foundation
principles for understanding macroeconomics. As we went through them,
you could see some of the implications for us as practitioners, as
taxpayers, and as (in some of our cases) small business owners. In this
section, we will take a closer look at how the current economic policies
of the government will likely impact upon medical practice in the U.S.

The
first and biggest area of impact is that of fiscal policy. The role of
the federal government in healthcare has increased substantially in
recent years for several reasons. The first has nothing to do with which
party is in power or who sits in the Oval Office. The demographics of
the U.S. are evolving and the combination of the entry of the Baby
Boomer generation and increases in longevity has substantially increased
the number of people in Medicare. The second is that the recession has
increased the number of unemployed in America, the number of people
taking disability, and the number of people covered by Medicaid. The
third is the healthcare reform bill itself, which increased the
involvement of the federal government in managing both public and
private sector healthcare.

The connection here is that we are
increasingly working with the federal government either directly or
indirectly at a time when it is not only insolvent but is likely to
become more financially troubled unless severe measures are taken
quickly. Furthermore, as our earlier discussion showed, those measures
will focus on healthcare delivery. There is nothing else in the federal
government’s obligations that is as large as healthcare, so we can
expect any “fixes” to include substantial pushes towards changing
healthcare delivery.

This was brought home by a Congressional Budget Office analysis of the impact of the healthcare bill of 2010.11
This analysis documented the growth in the commitment of the federal
government to healthcare, but it also raised the possibility that the
net effect on deficits would be an improvement, an assertion that has
been made in more recent analyses by the CBO.12

However,
multiple analyses by the CBO and others have raised concerns that the
projections may in fact substantially underestimate the impact upon
healthcare delivery. These uncertainties include the ability of Medicare
to limit spending per beneficiary to 2% per year, the role of rationing
in keeping costs down, and the degree to which employers will shift
employees onto public plans rather than private insurance plans.

This
raises the specter of continued cuts in reimbursement for Medicare
services in attempts to hold down growth in expenditures. The radiology
community has already seen substantial cuts to imaging through discounts
in multiple imaging tests performed on the same day. Many in the
current administration have declared a strong preference for supporting
primary care at the expense of specialty care, leading to the
expectation that cuts will be preferentially aimed at specialists like
radiologists.

This concern is borne out in analyses of how the SGR
(sustainable growth rate) mechanism for Medicare might be reformed. In
brief, this was set up with the intent to keep Medicare spending in line
with economic growth in the U.S. As discussed earlier in this article,
spending on healthcare, including Medicare, has generally outstripped
economic growth. The government has periodically let the threat of cuts
arise and then passed spending allotments to cover the deficit, without
addressing the underlying structure of the system. Currently, unless
there is a fix, the next round would result in about a 30% cut in
January of 2012.

Beyond the choices of a full allotment to fix
that 29.5% deficit (unlikely in this political climate) or a complete
cut (more unlikely, but not impossible), one alternative plan that the
government has announced is to cut specialty care reimbursement at a
substantial rate for several years while keeping primary care intact.
This prejudice against specialty services is likely to inform many
policy choices about healthcare going forward.13

Another
set of solutions to these macroeconomic pressures that has been
considered in the current administration revolves around ways to bundle
care. The most prominent of these are ACOs, or accountable care
organizations. These are attempts to combine quality goals with saving
money and then sharing those savings with the government. For the
interested reader, Breslau and Lexa,14 in the Journal of the American College of Radiology,
provided an early analysis of the role of radiologists in such an
arrangement. Note that while this is a rapidly evolving area, the desire
for both caps on spending and capitation is high and likely to continue
long after the first 3-year experiment with ACOs is over. We are likely
to see more mechanisms that try to set fixed amounts of spending on
healthcare from the national to the local levels. Related to these
efforts will likely be forms of rationing. It is beyond the scope of
this article to discuss the mechanisms by which this may be achieved,
but the economic pressures of an aging population suggest that
healthcare reimbursement will be used to ration care by effectiveness
and perhaps other means such as age and frailty.

At this point
many radiologists are probably ready to jump up and suggest smarter ways
to change the healthcare system. In my own mind, tort reform is front
and center in how to intelligently ration care and make the system more
rational. Unfortunately, we need far better studies to buttress our case
that torts irrationality drives healthcare costs. The data on the
direct costs are pretty good. These include the costs of insurance,
courts, settlements, etc. What we don’t have, but know intuitively, is
the cost of behaviors that are unscientific and driven by fear of a
lawsuit. Without tort reform, it is very unlikely that the healthcare
costs of the U.S. can be brought in line with those of similar nations,
since those nations do not share (or at least have a much milder case
of) what my French friends used to call “the American disease”.

Another
issue that has been at the front of many radiologists’ minds for years
is the waste of self-referral by non-radiologist physicians. This is
certainly a potential source of savings and it is likely that it will
wither in coming years. However, that is more likely going to be due to a
general reduction in the attractiveness of imaging rather than to
strong injunctions against the practice.

Conclusion

Many of
us became physicians in order to dedicate our lives to taking care of
patients and advancing medical science. We hadn’t expected that
economics and business would gain such influence over our field in our
lifetimes. The events of recent years and the political struggles in the
U.S. and elsewhere demand that we become literate in the macroeconomic
forces that underlie the policy decisions that will shape the nature of
medicine in developed nations.

Some closing advice for
radiologists who are concerned about these issues is first and foremost
to pay close attention to the fundamentals and to the specific policy
implications that impact us. Both are in flux now and can change rapidly
in the near future. Second, become politically aware and involved. Be
willing to vote your future. Radiology is an important contributor to
the health and welfare of our society — your actions, votes, donations
and time — are all needed in order to ensure the survival of our
specialty. Third, prepare for a world where our value will be constantly
re-evaluated and sometimes under direct attack. A deeper understanding
of disciplines such macroeconomics can help you prepare.

Resources for understanding economics

As
we noted above, one of the hard parts about getting good economic
information is that it may be politicized. The sources below all have
their own biases, small and large, but they excel in accuracy,
timeliness, and other key factors that make them good starting points
with articles for both generalists and specialists.